Peeyush Dalmia, Senior Partner, McKinsey & Company, says, “While current growth indicators are promising, the industry has not seen improvement in productivity. Achieving long-term success requires a fundamental transformation in how insurance products are designed, distributed, and serviced. The industry stands at an inflection point. Insurance companies that successfully implement these changes while ensuring focus on profitability will be well-positioned to capture the significant growth opportunities ahead.”
A new McKinsey & Company report ‘Steering Indian insurance from growth to value in the upcoming ‘techade’’ offers an analysis of the performance of Indian insurance industry and outlines key opportunities and challenges that could shape its near- and long-term performance.
The report estimates that the government could potentially save about $10 billion annually by expanding insurance penetration to encompass underserved populations and events.
Insurers’ ability to drive value has been impeded by challenges including inability to generate sufficient returns and managing operational efficiencies.
Despite the regulator’s target of ‘Insurance for All by 2047,’ the industry’s penetration rate has slipped from 4.2 percent in 2022 to 4 percent in 2023,indicating that its progress has not been on par with India’s economic growth.
A growing middle class, greater awareness, rising healthcare costs, and supportive regulations have combined to offer high growth for India’s insurance industry over the last few years.
However, there is immense growth potential as a significant portion of the Indian population and insurable assets remain uninsured, increasing the risks of high out-of-pocket expenses, adding to the overall economic strain, and undermining the industry’s ability to bring full benefit to society.
Highlights of the report:
• Gross written premium exceeded $130 billion and a CAGR of 11 percent, in the three-year period FY2020-23, outpacing Asian peers.
• Over a longer term, the life insurance market recorded an 11.4 percent CAGR in the seven-year period, FY16-23, while general insurance market grew 15 percent over the same period.
• Indian life insurers maintain valuation multiples of seven to ten times price-to-book,compared to just one to two times for regional peers in Asia.
• This premium in valuation reflects investor confidence in the sector’s growth trajectory,helped by significant growth expectations, strong return on equity, an underpenetrated market, promising demographics, and robust distribution networks.
However, despite achieving a robust CAGR of over 17% in New Business Premium (NBP), the top five private life insurance companies in India have experienced tepid net profit growth of under 2% CAGR over the past five years.
• The growth in premiums for general insurers has been predominantly driven by increased hiring, with little to no improvement in productivity among top players. As a result, their per employee productivity (measured as premium per employee) has stagnated at a meagre CAGR of just 0.5%.
• In contrast, leading players across life insurance, banking, and asset management have successfully expanded their businesses at a pace that outstrips their employee growth (CAGR of 2 to 6 percent), reaping the benefits of enhanced productivity.
• Despite a decline in claims ratios, a steady increase in expense ratios among traditional players (till 2023) has meant that the combined ratio has trended upwards. Improvement in leading productivity metrics, such as operating expenses per life or policy, has been negligible over the past two to three years for both life and general insurance companies.
• According to McKinsey analysis, the government could potentially save about $10 billion annually by expanding insurance penetration to encompass underserved populations and events. Comprehensive life insurance coverage could assist the government in alleviating the burden of providing ex-gratia benefits to families affected by the loss of life or livelihood due to accidents, unforeseen events. Affordable private health insurance coverage could reduce the strain on government healthcare, potentially freeing government funds to improve healthcare infrastructure.
Targeted intervention programmes for crop insurance could contribute to minimizing crop losses, reducing loan defaults, and improving yield. Creation of natural disaster insurance pools with mandatory coverage for ecologically sensitive areas could minimize financial losses for small and medium-size enterprises caused by catastrophic events.
Survey findings: Demand for personalization, need for appliance insurance, and most-preferred health ecosystem features:
The report showcases findings from a survey conducted in August 2024, with responses from ~5,000 insurance customers and 500 agents across life, health, and motor insurance, across Tier 1/2/3 cities in India.
Key findings:
• Embedded insurance offers significant opportunities for insurers: About 70% of customers spend over Rs 25,000 annually on purchasing or repairing appliances, yet only 40% have any form of insurance coverage.
This highlights a significant potential for embedded appliance insurance.
• Needs-based selling is critical as agents remain a preferred channel in the insurance purchase journey – more than half of customers seeking more personalized financial guidance from their agents.
• 35%+ of respondents switch from online discovery to offline purchase, highlighting the need for seamless omnichannel engagement with context continuity and consistent experiences across channels, given the insurance industry’s fewer touchpoints (2-4/year) compared to banking (750+/year) currently.
• 50% of respondents highlighted that fitness and nutritional counselling programs would appeal to them as part of their health plan, underscoring the importance of an ecosystem play in the insurance industry to enhance customer satisfaction.
• On the agent side, over 80% of agent respondents mention receiving requests for claims assistance and 70% of health agents for care navigation. Over 90% of agents are seeking insurers’ assistance in generating leads, aimed at achieving more sustainable income for insurance agents .
The insurance industry in India is poised to benefit from a confluence of nationwide tailwinds. On the health insurance front, digitization of healthcare by the National Health Authority through initiatives like Ayushman Bharat Health Account (ABHA) IDs and expanded remote services is set to streamline administrative processes, cut down on preliminary tests, and enhance underwriting accuracy, which would lead to quicker claims processing and reduced overheads.
In general insurance, new industries such as semiconductor chips and biotechnology, alongside the growth of MSMEs, present substantial opportunities for insurers to develop specialized products, catering to the specific risks of these sectors and broadening their market reach.
Peeyush Dalmia, Senior Partner, McKinsey & Company, says, “While current growth indicators are promising, the industry has not seen improvement in productivity. Achieving long-term success requires a fundamental transformation in how insurance products are designed, distributed, and serviced. The industry stands at an inflection point. Insurance companies that successfully implement these changes while ensuring focus on profitability will be well-positioned to capture the significant growth opportunities ahead.”
According to Abhilash Sridharan, Partner, McKinsey & Company, “India’s insurance industry has demonstrated robust growth potential, evidenced by strong valuations and market expansion.”
However, to achieve the ambitious vision of ‘Insurance for All by 2047’, players must address fundamental profitability and operational efficiency challenges. The unlock lies in leveraging data, advanced analytics, and AI / Gen AI to create innovative, customer-centric solutions, while building sustainable business models. By grounding these models in data-driven decisions and operational excellence, Indian insurers could exceed market expectations, thereby setting a global benchmark for the industry, he said.